Perpetual allowed to keep Lehman Brothers settlement secret

PERPETUAL TRUSTEES has succeeded in keeping a December settlement in a New York court case against Lehman Brothers under wraps.

By InvestSMART · 25 Mar 2011

By InvestSMART ·
25 Mar 2011

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PERPETUAL TRUSTEES has succeeded in keeping a December settlement in a New York court case against Lehman Brothers under wraps.

Perpetual, trustee for 1000 Australian investors who paid $125 million for synthetic collateralised debt obligations called Mahogany notes, had been asked to provide details of the agreement to the liquidator of Lehman Brothers Australia.

The liquidator, Stephen Parbery, is defending a Federal Court class action by 72 councils, charities and churches that invested in similar notes. The class action members are trying to recover losses of $260 million, some of which relate to a collateralised debt obligations series called Dante.

The Mahogany and Dante notes, which are linked to credit default swaps, were originated by a US arm of the collapsed Lehman group, Lehman Brothers Special Financing Inc.

Justice Steven Rares set aside Mr Parbery's subpoena to Perpetual yesterday, saying the "private and currently confidential nature of the settlement between Perpetual and LBSF suggest that the amount agreed between those parties for the purpose of resolving their dispute, albeit on instruments that are materially similar to those in issue here, will not assist in determining the value of the notes in these proceedings".

Justice Rares said a complicating factor was that in a related English case, rather than settling, Lehman Brothers Special Financing had appealed to the Supreme Court of the United Kingdom. The hearing was this month and judgment is pending.

"This tends to suggest that the evidence of the settlement amount would require a deal of explanation or exploration in order to appreciate its true significance," he said.

There is also a related appeal under way in New York to overturna Bankruptcy Court ruling infavour of Lehman Brothers Special Financing.

Justice Rares said that in order to quantify damages payable in the class action he would have to "determine which of the two foreign courts will govern the ultimate rights of the applicant councils to receive value from the Dante CDOs which they hold".

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Frequently Asked Questions about this Article…

What happened when Perpetual tried to keep the Lehman Brothers settlement confidential?

Perpetual succeeded in keeping a December settlement in a New York court case against Lehman Brothers confidential. Justice Steven Rares set aside a subpoena seeking the settlement details, saying the private and confidential nature of the settlement meant its amount would not help determine the value of the notes at issue in the Australian proceedings.

Who were the investors represented by Perpetual and what are Mahogany notes?

Perpetual acted as trustee for about 1,000 Australian investors who paid $125 million for synthetic collateralised debt obligations called Mahogany notes. The Mahogany notes were linked to credit default swaps and were originated by Lehman Brothers Special Financing Inc., a US arm of the collapsed Lehman group.

What is the class action related to Lehman-linked CDOs and who is involved?

A Federal Court class action is being defended by Lehman Brothers Australia’s liquidator, Stephen Parbery. The claim is brought by 72 councils, charities and churches that invested in similar notes and are trying to recover losses totalling about $260 million, some of which relate to a CDO series called Dante.

What are Dante CDOs and how do they relate to Mahogany notes?

Dante CDOs are another series of collateralised debt obligations linked to credit default swaps. Like the Mahogany notes, Dante was originated by Lehman Brothers Special Financing Inc. and forms part of the losses being pursued in the class action.

Why did Justice Steven Rares say the settlement amount wouldn’t help the court proceedings?

Justice Rares explained the private and confidential nature of the Perpetual–LBSF settlement meant the agreed amount would not assist in valuing the notes in the current proceedings. He also noted complications from related foreign litigation that would require explanation to understand the settlement’s significance.

Are there related appeals overseas that affect these Lehman cases?

Yes. The article notes a related English case where Lehman Brothers Special Financing appealed to the UK Supreme Court (hearing held and judgment pending), and there is also an appeal underway in New York to overturn a Bankruptcy Court ruling in favour of Lehman Brothers Special Financing. Those foreign proceedings complicate the Australian litigation.

What does this secrecy and ongoing litigation mean for everyday investors in Lehman-linked notes?

Based on the article, the confidential settlement and continuing appeals in the UK and New York create uncertainty about how much value, if any, investors might recover. The court considered the settlement amount unlikely to clarify the notes’ value in the Australian proceedings, so outcomes and recoveries remain uncertain.

Who is Lehman Brothers Special Financing Inc. in the context of these CDOs?

Lehman Brothers Special Financing Inc. (LBSF) is the US arm of the collapsed Lehman group that originated the Mahogany and Dante CDOs linked to credit default swaps. LBSF is a central defendant in related foreign and Australian litigation described in the article.